WRAPUP 1-Investors cheer Burger King-Tim Hortons 'combo deal'

TORONTO Aug 25 Investors in Burger King
Worldwide Inc and Tim Hortons Inc applauded
news of a potential merger between the two fast food chains,
seeing both tax savings and strategic rationale for a
combination.

The two companies confirmed late on Sunday that Burger King
is in talks to acquire the Canadian coffee and doughnut chain,
and that the combined entity would be based in Canada.
Shares of Tim Hortons jumped 18.9 percent to
close at $74.72 on the New York Stock Exchange on Monday, while
shares of Burger King, which is majority owned by investment
firm 3G Capital, rose 19.5 percent to $32.40.

Investors and tax experts said the main reason for Burger
King to move its domicile to Canada is to avoid having to pay
double taxation on profits earned abroad, as the company would
have to do if it remained in the United States.

This element of the Canadian tax regime is seen as a bigger
draw than its federal corporate tax rate of 15 percent, though
that is nominally lower than the U.S. rate of 35 percent.
Canadian provincial taxes typically bring the tax rate companies
pay closer to 26 percent, while many U.S. companies can find
exemptions to bring down their taxes to a comparable level.

While Burger King's pre-tax foreign income was just a few
hundred million dollars last year, the benefits of a Canadian
domicile will grow as the combined companies expand overseas,
experts said.

"I think it has significant potential to substantially
decrease Burger King's corporate income taxes in the United
States," said Bret Wells, an assistant law professor at the
University of Houston. The benefit would come through "earnings
stripping" the U.S. tax base in a way that is not available now,
he said.

With a so-called tax inversion deal, Burger King could
set-up a foreign affiliate in a low-tax regime such as
Switzerland, have the U.S. operations pay income to that
affiliate, and repatriate the money back to Canada.

Beyond tax savings, investors and industry experts said Tim
Hortons' coffee products can help Burger King chip away at
McDonald's Corp's hold in the quick-serve breakfast
market. And Burger King can help Tim Hortons expand in the
United States and abroad, they said.

"Lots of businesses do deals to save money on taxes, but the
economic fundamentals are questionable and sometimes downright
lacking," said Anthony Sabino, a New York-based law professor at
St John's University.

"But this situation is like the double whopper for Burger
King. They are going to save money on taxes, but they're also
going to have natural synergies merging with a sister food
company. It's a smart play."

BIG PREMIUM

Toronto-based investors and analysts say they expect Burger
King to have to pay top dollar to convince shareholders of Tim
Hortons to sell.

Raymond James analyst Kenric Tyghe said he expects Burger
King to pay between C$85.00 and C$95.00 a share for Tim Hortons,
equivalent to a premium of 24 percent to 38 percent over its
closing price of C$68.78 on the Toronto stock exchange last
Friday. The stock closed at C$82.03 on Monday.

"As a Tim Hortons shareholder, we would expect at least C$85
a share equivalent, which is about 2.75 shares of Burger King
for every Tim Hortons share," said David Baskin, president of
Baskin Financial Services, which controls about 180,000 shares
in Tim Hortons

"That would be a fair premium. Much less than that and
they're going to start getting push back from Canadian
institutions."

Robert Willens, a New York-based accounting and tax expert,
said locating the domicile of the combined entity in Canada
would not help much on the tax side. However, he thinks it could
potentially ease regulatory approval of such a deal in Canada,
where a foreign takeover of Tim Hortons could face backlash.

Tim Hortons was bought by Wendy's International Inc in 1995,
but later spun out in 2006 after the fast food chain came under
pressure from activist investor Nelson Peltz.

In the United States, Burger King is expected to raise
hackles if it follows through on the plan to domicile in Canada
to reduce its tax burden.

Recent attempts by companies to do such tax inversion deals
have drawn the criticism of U.S. President Barack Obama.

Tax inversions have become popular in recent months as low
interest rates are making it cheaper for companies to make
acquisitions.

"The United States is not a very good place in some respects
for a parent company to be, because of the U.S. tax system,"
said Angelo Nikolakakis, a tax expert with accounting firm Ernst
& Young.
(Additional reporting by Leah Schnurr, Dena Aubin, Soyoung Kim,
Alastair Sharp and Lisa Baertlein; Editing by Jeffrey Hodgson
and Tiffany Wu)

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